ACCA

Revision Examination September 2020 – June 2021 exams

Financial Reporting (FR)

Time allowed: 3 hours

This paper is divided into three sections:

Section A – ALL FIFTEEN questions are compulsory and MUST be attempted.
Section B – ALL FIFTEEN questions are compulsory and MUST be attempted.
Section C – BOTH questions are compulsory and MUST be attempted.

We are grateful to the Association of Chartered Certified Accountants for

permission to reproduce past examination questions and model answers.
© First Intuition Ltd, 2020
 2 R e v i s i o n e xami n at i o n q u e s ti o n s A C C A FR

Section A
ALL FIFTEEN questions are compulsory and MUST be attempted

1 Which TWO of the following are indicators that an investing entity has significant influence
over an investee?
 The investor owns 15% of the voting power of the investee
 The investor has representation on the board of directors of the investee
 There are frequent material transactions between the investor and the investee
 The investor has the power to determine the amount of dividend it receives from the
investee each year (2 marks)

2 Which TWO of the following statements are true?

 An entity can only increase its gross profit margin by increasing its sales prices or
reducing its overall costs of production.
 Revaluing non-current assets upwards would (other things being equal) lead to a
reduction in the return on capital employed.
 An entity can increase its return on capital employed in the short term by postponing
replacement of non-current assets.
 An entity can increase its gross profit margin by introducing stronger credit control
procedures (2 marks)

3 An entity should recognise revenue when it satisfies a performance obligation by transferring

promised goods to a customer.
Which of the following always indicates that an entity has satisfied its performance
obligations under a contract?
 The customer has accepted the goods
 The customer has legal title to the goods
 The customer has obtained control of the goods
 The entity has physically delivered the goods to the customer (2 marks)

4 Which of the following events which occur after the reporting date but before the financial
statements are authorised for issue is a NON-ADJUSTING event?
 An accounting error is discovered that showed that the financial statements were
incorrect
 An issue of equity shares at market value after the year-end
 A property valuation that showed that the property was impaired at the year-end
 The insolvency of a customer who owed a debt at the year-end which is still outstanding
(2 marks)
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5 On 30 September 20X4, Gaythorne Co purchased 80% of the equity share capital of Johnson Co
for $1.45 million. The book value of Johnson Co’s net assets at the date of acquisition was
$1.35 million. The fair value of Johnson Co’s property, plant and equipment at that date was
$100,000 greater than book value. Johnson Co’s financial statements at 30 September 20X4
contained notes referring to a contingent liability (with a fair value of $200,000).
Gaythorne Co acquired Johnson Co with the intention of restructuring the latter’s production
facilities. The estimated costs of the restructuring plan totalled $115,000.
Gaythorne Co has no other subsidiaries.
Only two of the following four statements are true. Identify those statements, and mark the
remaining ones as false.

True False
The 20% non-controlling interest must be measured at its fair value  
at 30 September 20X4
The fair value of the identifiable net assets acquired should not  
include the contingent liability
The fair value of the identifiable net assets acquired should not  
include the estimated cost of the restructuring plan
At 30 September 20X4, the fair value of Johnson’s identifiable net  
assets is $1.25 million
(2 marks)

6 The following information has been extracted from the statement of financial position of
Marchamp Co for the year ended 31 December 20X3:
20X3 20X2
Assets $000 $000
Non-current assets
Property, plant and equipment 12,600 9,500
On 1 March 20X3, Marchamp Co acquired additional plant under a lease that resulted in a right-
of-use asset of $1.2 million. On this date it also revalued its property upwards by $1.8 million
and transferred $580,000 of the resulting revaluation reserve this created to deferred tax. There
were no disposals of non-current assets during the period.
Depreciation of property, plant and equipment was $800,000 for the year ended 31 December 20X3.
Calculate the amount that should be reported for purchases of property, plant and equipment
in the statement of cash flows for the year ended 31 December 20X3.

$ (2 marks)

7 During the year ended 30 September 20X4, Esher Co replaced a large part of its plant and
equipment. It financed this investment by entering into a lease agreement. Esher Co has never
previously leased any of its assets.
Which one of the following ratios would NOT be directly affected by the impact of the lease on
Esher Co’s financial statements?
 Gearing
 Net profit margin
 Payables days
 Return on capital employed (2 marks)
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8 On 1 January 20X4, Key Co issued 10 million 5% convertible $1 bonds redeemable at par on 31

December 20X9. The market rate of interest for a similar bond with a five-year term but no
conversion terms is 7%.
The proceeds of $10 million were debited to bank; $9,180,000 was credited to non-current
liabilities and $820,000 was credited to equity (to the nearest ‘000).
In the statement of profit or loss for the year ended 31 December 20X4, the finance cost in
respect of the bonds is:
 $459,000
 $500,000
 $642,600
 $700,000 (2 marks)

9 Which of the following should be used to measure the fair value of an asset, if available?
 A quoted price for an identical asset in an active market
 A quoted price for a similar asset in an active market
 The value in use of the asset
 The net carrying amount of the asset (2 marks)

10 Which of the following statements regarding concepts of financial reporting is NOT correct?
 Information is material if omitting it, misstating it or obscuring it could influence
decisions that users make on the basis of financial information about a specific reporting
entity.
 The enhancing qualitative characteristics of useful financial information are
comparability, verifiability, timeliness and understandability.
 The financial statements are normally prepared on the assumption that an entity has
neither the intention nor the need to enter liquidation or cease trading.
 To be a perfectly faithful representation, financial information must be complete, neutral
and verifiable. (2 marks)

11 Xerxes Co owns 75% of the ordinary share capital of Vincent Co, its only subsidiary. In the year
ended 31 March 20X4 Vincent Co made a profit of $130,000. A fair value adjustment at
acquisition resulted in additional depreciation of $10,000 in the year ended 31 March 20X4.
During the year, Xerxes Co sold goods to Vincent Co and consolidated inventories have been
reduced by a provision for unrealised profit of $6,000.
Calculate the share of profit for the year attributable to the non-controlling interest for the
year ended 31 March 20X4.

$ (2 marks)

12 The non-current asset turnover ratios of entities A and B are 0.44 and 0.82 respectively.
Which one of the following is a possible explanation for the difference?
 A’s non-current assets are nearing the end of their useful life; B’s are new
 A measures its non-current assets at historic cost, while B has recently revalued its assets
 A has purchased new plant and equipment during the year; B’s assets are older
 A is a technology company; B is a manufacturer (2 marks)
A C C A FR R e v i s i o n e xa mi n at i o n q u e s ti o n s 5

13 Which of the following should be accounted for as subsidiaries in the consolidated financial
statements of Corvid Co?
1 Oriole Co - Corvid Co owns 75% of Oriole Co and has appointed a majority of its directors.
Oriole Co carries out a business that is very different from the activities of the rest of the
group and the directors consider that it consolidating it would not provide relevant
information to users
2 Finch Co - Corvid Co currently owns 35% of the share capital of Finch Co and holds
options to purchase another 25% which it can exercise immediately
3 Merle Co - Corvid Co owns 90% of Merle Co. Merle Co operates in a country where a new
government has seized control of all businesses. Corvid Co has lost control of its
investment for the foreseeable future
 1 and 2 only
 2 and 3 only
 1 and 3 only
 1, 2 and 3

14 Loveday Co owns 70% of the equity share capital of Minette Co. Minette Co sold goods to
Loveday Co with a sales value of $140,000. Half of these goods remain in Loveday Co’s
inventories at the year end. Minette Co makes 20% profit margin on all sales.
What is the amount of the adjustment required to consolidated cost of sales for the year?
 $112,000
 $126,000
 $130,200
 $154,000 (2 marks)

15 Which of the following events would result in an asset being recognised in Kildare Co’s
statement of financial position at 31 January 20X4?
 Kildare Co spent $50,000 on an advertising campaign in January 20X4. Management
expects the advertising to generate additional sales of $100,000 over the period February
to April 20X4.
 Kildare Co is taking legal action against a contractor for faulty work. Advice from its legal
team is that it is likely that the company will receive $250,000 in settlement of its claim
within the next 12 months.
 Kildare Co purchased a patent from another company for $75,000 on 1 March 20X3.
 Kildare Co has developed a new brand name internally. Management values the brand
name at $150,000. (2 marks)

(Total = 30 marks)
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Section B
ALL FIFTEEN questions are compulsory and MUST be attempted

The following scenario relates to questions 16 – 20.

Tunshill Co
The directors of Tunshill Co are disappointed by the draft profit for the year ended 30 September
20X6. The company’s assistant accountant has suggested two areas where she believes the reported
profit may be improved:
(i) A major item of plant that cost $20 million to purchase and install on 1 October 20X3 is
being depreciated on a straight-line basis over a five-year period (assuming no residual
value). In the financial statements for the year ended 30 September 20X5, the
accumulated depreciation was $8 million ($20 million/5 years × 2). At the beginning of
the current year (1 October 20X5) the Production Manager believed that the plant was
likely to last eight years in total (i.e. from the date of its purchase).
(ii) Most of Tunshill’s competitors value their inventory using the average cost (AVCO) basis,
whereas Tunshill uses the first in, first out (FIFO) basis. The value of Tunshill’s inventory
at 30 September 20X6 (on the FIFO basis) is $20 million, however on the AVCO basis it
would be valued at $18 million. Tunshill’s inventory at 30 September 20X5 was reported
as $15 million, however on the AVCO basis it would have been reported as $13.4 million.
Purchases for the year ended 30 September 20X6 were $100 million.

16 Which TWO of the following statements regarding accounting policies and accounting
estimates are correct?
 Where an IFRS applies to a specific transaction or event, the accounting policy used must
be as prescribed in that Standard.
 In the absence of a Standard, management must apply the principles in the IFRS
Conceptual Framework.
 An entity can only change an accounting policy if the change is required by a change in an
accounting standard.
 Accounting estimates are used to measure the carrying amounts of assets and liabilities,
or related expenses and income.

17 Which of the following is a change of accounting policy?

 Classifying commission earned as revenue in the statement of profit or loss, having
previously classified it as other operating income
 Switching to purchasing plant using leases from a previous policy of purchasing plant for
cash
 Changing the value of a subsidiary’s inventory in line with the group policy for inventory
valuation when preparing the consolidated financial statements
 Revising the remaining useful life of a depreciable asset
A C C A FR R e v i s i o n e xa mi n at i o n q u e s ti o n s 7

18 If the useful life of the plant is increased to eight years from 1 October 20X5, what amount
should be charged or credited to profit or loss for depreciation for the year ended
30 September 20X6?
 $0.5 million credit
 $2 million charge
 $2.5 million charge
 $4 million charge

19 Use the tokens to complete the following sentence.

If Tunshill Co changes its inventory valuation method from FIFO to AVCO, its reported profit for

the year ended 30 September 20X6 would by

Tokens:

increase $400,000
decrease $2,000,000

20 If Tunshill Co changes its inventory valuation method from FIFO to AVCO, what would be the
adjustment to retained earnings at 1 October 20X5?
 $Nil
 $1.6 million reduction
 $1.6 million increase
 $2 million reduction

The following scenario relates to questions 21 – 25.

Moston Co
The following trial balance extracts (i.e. it is not a complete trial balance) relate to Moston Co as at
30 June 20X5:
$000 $000
Revenue (note (i)) 113,500
Research and development costs (note (ii)) 7,800
Administrative expenses (note (iv)) 6,800
Loan note interest paid (note (iv)) 1,000
5% loan note (note (iv)) 20,000
Revaluation surplus as at 1 July 20X4 3,000
Property at valuation 1 July 20X4 (note (iii)) 28,500
The following notes are relevant:
(i) Revenue includes a $3 million sale made on 1 January 20X5 of maturing goods which are not
biological assets. The carrying amount of these goods at the date of sale was $2 million. Moston Co is
still in possession of the goods (but they have not been included in the inventory count) and has an
unexercised option to repurchase them at any time in the next three years. In three years’ time the
goods are expected to be worth $5 million. The repurchase price will be the original selling price plus
interest at 10% per annum from the date of sale to the date of repurchase.
(ii) Moston Co commenced a research and development project on 1 January 20X5. It spent $1 million
per month on research until 31 March 20X5, at which date the project passed into the development
stage. From this date it spent $1.6 million per month until the year end (30 June 20X5), at which date
8 R e v i s i o n e xami n at i o n q u e s ti o n s A C C A FR

development was completed. However, it was not until 1 May 20X5 that the directors of Moston Co
were confident that the new product would be a commercial success.
(iii) Moston Co’s property is carried at fair value which at 30 June 20X5 was $29 million. The
remaining life of the property at the beginning of the year (1 July 20X4) was 15 years. Moston
Co does not make an annual transfer to retained earnings in respect of the revaluation surplus.
Ignore deferred tax on the revaluation.
No depreciation has yet been charged on any non-current asset for the year ended 30 June 20X5.
(iv) The 5% loan note was issued on 1 July 20X4 at its nominal value of $20 million incurring direct
issue costs of $500,000 which have been charged to administrative expenses. The loan note will
be redeemed after three years at a premium which gives the loan note an effective finance cost
of 8% per annum. Annual interest was paid on 30 June 20X5.

21 Which TWO of the following statements are correct, in respect of the sale of maturing goods (point
(i))?
 Moston Co has correctly accounted for the transaction as a sale because the assets that
have been sold are not biological assets.
 Moston Co is almost certain to exercise the option to repurchase the goods in three
years’ time.
 Moston Co should recognise a liability of $3 million in the statement of financial position
 The goods should be excluded from inventory because they have been sold under a bill
and hold arrangement.

22 Which of the following is NOT a requirement for the recognition of an intangible asset arising
from development?
 Intention to complete the intangible asset and to use it or sell it
 The existence of an external market for the product or service that is being developed
 Ability to reliably measure the expenditure related to the intangible asset during its
development
 The availability of adequate technical, financial and other resources to complete the
development

23 What amount should be recognised in the statement of profit or loss and other comprehensive
income for the year ended 30 June 20X5 in respect of the research and development project?
 $3,000,000
 $3,200,000
 $4,600,000
 $7,800,000

24 Calculate the balance on the revaluation surplus as at 30 June 20X5.

$ 000

25 What is the finance cost for the year ended 30 June 20X5 in respect of the 5% loan note?
 $975,000
 $1,560,000
 $1,600,000
 $1,640,000
A C C A FR R e v i s i o n e xa mi n at i o n q u e s ti o n s 9

The following scenario relates to questions 26 – 30.

Barstead Co
The following figures have been calculated from the financial statements (including comparatives) of
Barstead Co for the year ended 30 September 20X5.

Increase in profit after taxation 80%

Increase in (basic) earnings per share 5%
Increase in diluted earnings per share 2%
The profit after tax for Barstead Co for the year ended 30 September 20X6 was $15 million.
At 1 October 20X5 the company had in issue 36 million equity shares and a $10 million convertible
loan note. The loan note will mature in 20X7 and will be redeemed at par or converted to equity
shares on the basis of 25 shares for each $100 of loan note at the loan-note holders’ option. A similar
loan note without the conversion option would carry a rate of interest of 8%.
On 1 January 20X6 Barstead Co made a fully subscribed rights issue of one new share for every four
shares held, at a price of $2.80 each. The market price of the equity shares of Barstead Co immediately
before the issue was $3.80.
Barstead Co’s income tax rate is 25%.

26 Based on the three percentage measures that have been calculated from the previous years’
financial statements, which TWO of the following statements are correct?
 Barstead Co has issued equity shares during the year
 Earnings per share may be reduced in future years
 The net profit margin has increased by 80%
 The number of ordinary shares in issue will not increase in the near future

27 What is Barstead Co’s basic earnings per share for the year ended 30 September 20X6?
 33.2 cents
 34.7 cents
 35.1 cents
 35.5 cents

28 What is the earnings figure that should be used in the calculation of diluted earnings per share
for the year ended 30 September 20X6? (give your answer to one decimal place)

$ million

29 By what amount should the number of shares used in the basic earnings per share calculation
be increased in order to calculate diluted earnings per share for the year ended 30 September
20X6?
 0
 2,500,000
 9,000,000
 11,500,000
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30 Barstead Co is considering further issues of equity and debt instruments during the year ended
30 September 20X7.
Which TWO of the following would cause the comparative figure for earnings per share to be
different from the basic earnings per share disclosed in the financial statements for the year
ended 30 September 20X6?
 A bonus issue of 1 new ordinary share for every 3 held
 An issue of a convertible loan note
 An issue of $1 ordinary shares at full market price
 An issue of options to purchase ordinary shares in 20X7
 A rights issue of 1 new ordinary share for every 6 held
A C C A FR R e v i s i o n e xa mi n at i o n q u e s ti o n s 11

Section C
BOTH questions are compulsory and MUST be attempted

31 HAVERFORD CO
Below is the trial balance for Haverford Co at 31 December 20X7:
$000 $000
Property – carrying amount 1 January 20X7 (note (iv)) 18,000
Ordinary shares $1 at 1 January 20X7 (note (iii)) 20,000
Other components of equity (Share premium) at 1 January 20X7 (note (iii)) 3,000
Revaluation surplus at 1 January 20X7 (note (iv)) 800
Retained earnings at 1 January 20X7 6,270
Draft profit for the year ended 31 December 20X7 2,250
4% Convertible loan notes (note (i)) 8,000
Dividends paid 3,620
Cash received from contract customer (note (ii)) 1,400
Cost incurred on contract to date (note (ii)) 1,900
Inventories (note (v)) 4,310
Trade receivables 5,510
Cash 10,320
Current liabilities 1,940
43,660 43,660

The following notes are relevant:

(i) On 1 January 20X7, Haverford Co issued 80,000 $100 4% convertible loan notes. The loan notes
can be converted to equity shares on 31 December 20X9 or redeemed at par on the same date.
An equivalent loan without the conversion rights would have required interest of 6%. Interest is
payable annually in arrears on 31 December each year. The annual payment has been included
in finance costs for the year. The present value of $1 receivable at the end of each year, based
on discount rates of 4% and 6%, are:
4% 6%
End of year 1 0.962 0.943
End of year 2 0.925 0.890
End of year 3 0.889 0.840
(ii) During the year, Haverford Co entered into a contract to construct an asset for a customer,
satisfying the performance obligation over time. The contract had a total price of $14m. The
costs to date of $1.9m are included in the above trial balance. Costs to complete the contract
are estimated at $7.1m.
At 31 December 20X7, the contract is estimated to be 40% complete. To date, Haverford Co has
received $1.4m from the customer and this is shown in the above trial balance.
(iii) Haverford Co made a 1 for 5 bonus issue on 31 December 20X7, which has not yet been
recorded in the above trial balance. Haverford Co intends to utilise the share premium as far as
possible in recording the bonus issue.
(iv) Haverford Co’s property had previously been revalued upwards, leading to the balance on the
revaluation surplus at 1 January 20X7. The property had a remaining life of 25 years at 1 January
20X7.
At 31 December 20X7, the property was valued at $16m.
12 R e v i s i o n e xami n at i o n q u e s ti o n s A C C A FR

No entries have yet been made to account for the current year’s depreciation charge or the
property valuation at 31 December 20X7. Haverford Co does not make an annual transfer from
the revaluation surplus in respect of excess depreciation.
(v) It has been discovered that inventory totalling $0.39m had been omitted from the final
inventory count in the above trial balance.
Required:
(a) Calculate the adjusted profit for Haverford Co for the year ended 31 December 20X7.
(6 marks)
(b) Prepare the statement of changes in equity for Haverford Co for the year ended 31 December
20X7. (6 marks)
(c) Prepare the statement of financial position for Haverford Co as at 31 December 20X7.
(8 marks)

(20 marks)

32 HYDAN CO
Xpand Co is a publicly listed company which has experienced rapid growth in recent years through the
acquisition and integration of other companies. Xpand Co is interested in acquiring Hydan Co, a
retailing company, which is one of several companies owned and managed by the same family.
The summarised financial statements of Hydan Co for the year ended 30 September 20X4 are:
Statement of profit or loss
$000
Revenue 70,000
Cost of sales (45,000)
Gross profit 25,000
Operating costs (7,000)
Directors’ salaries (1,000)
Profit before tax 17,000
Income tax expense (3,000)
Profit for the year 14,000
A C C A FR R e v i s i o n e xa mi n at i o n q u e s ti o n s 13

Statement of financial position

$000 $000
Assets
Non-current assets
Property, plant and equipment 32,400
Current assets
Inventory 7,500
Bank 100 7,600
Total assets 40,000

Equity and liabilities

Equity
Equity shares of $1 each 1,000
Retained earnings 18,700
19,700
Non-current liabilities
Directors’ loan accounts (interest free) 10,000
Current liabilities
Trade payables 7,500
Current tax payable 2,800 10,300
Total equity and liabilities 40,000

From the above financial statements, Xpand Co has calculated for Hydan Co the ratios below for the
year ended 30 September 20X4. It has also obtained the equivalent ratios for the retail sector average
which can be taken to represent Hydan Co’s sector.
Sector
Hydan Co average
Return on equity (ROE) (including directors’ loan accounts) 47.1% 22.0%
Net asset turnover 2.36 times 1.67 times
Gross profit margin 35.7% 30.0%
Net profit margin 20.0% 12.0%
From enquiries made, Xpand Co has learned the following information:
(1) Hydan Co buys all of its trading inventory from another of the family companies at a price which
is 10% less than the market price for such goods.
(2) After the acquisition, Xpand Co would replace the existing board of directors and need to pay
remuneration of $2.5 million per annum.
(3) The directors’ loan accounts would be repaid by obtaining a loan of the same amount with
interest at 10% per annum.
(4) Xpand Co expects the purchase price of Hydan Co to be $30 million.
Required:
(a) Recalculate the ratios for Hydan Co after making appropriate adjustments to the financial
statements for notes (1) to (4) above. For this purpose, the expected purchase price of
$30 million should be taken as Hydan Co’s equity and net assets are equal to this equity plus the
loan. You may assume the changes will have no effect on taxation. (6 marks)
(b) In relation to the ratios calculated in (a) above, and the ratios for Hydan Co given in the
question, comment on the performance of Hydan Co compared to its retail sector average.
(10 marks)
(c) Explain four possible limitations of the usefulness of the above comparison. (4 marks)

(Total = 20 marks)
14 R e v i s i o n e xami n at i o n q u e s ti o n s A C C A FR